United States: PCAOB Adopts New Auditor Reporting Standard

After more than six years of outreach and public comment, on June 1, 2017, the Public Company Accounting Oversight Board ("PCAOB") adopted a new auditor reporting standard1 that, if approved by the SEC, would significantly expand the existing auditor's report. The new standard would require the auditor's report to include: (i) disclosure of "critical audit matters" ("CAMs"), (ii) disclosure of auditor tenure, and (iii) other related improvements to the auditor's report. The new standard would generally apply to audits conducted under PCAOB standards, although broker-dealers, investment companies other than business development companies, employee benefit plans and emerging growth companies would be exempt from the CAM disclosure requirement. In adopting these changes, the PCAOB intended to make the auditor's report more informative and relevant to investors and other financial statement users. While the new standard is subject to SEC approval and its implementation would be phased in over time, public companies and their audit committees should consider engaging with their auditors now to discuss how their auditors expect to approach the process for identifying and disclosing CAMs as well as understand any other potential impacts of the new standard.

Critical Audit Matters

The CAM disclosures are the heart of the new changes. Under the new standard, a CAM is any matter arising from the audit of the financial statements that (1) was communicated or required to be communicated to the audit committee, (2) relates to accounts or disclosures that are material to the financial statements, and (3) involved especially challenging, subjective, or complex auditor judgment. The adopting release contained a helpful flowchart (reproduced on the attached Annex A) that illustrates the process for determining and communicating CAMs under the new standard.

Audit Committee Communications. All communications between an auditor and the audit committee (and any required communications that are not actually made) would be the source for CAMs. Under PCAOB standards, auditors are required to communicate to the audit committee, among other things: significant risks identified by the auditor; certain matters regarding the company's accounting policies, practices, and estimates; significant unusual transactions; certain matters regarding the auditor's evaluation of the company's relationships and transactions with related parties; and other matters arising from the audit that are significant to the oversight of the company's financial reporting process. While some commenters had raised concerns that using audit committee communications as the source for CAMs could "chill" communications between the auditor, management and the audit committee, the PCAOB noted that the communication requirements are not changing and stated its belief that, given the breadth of those requirements, there would likely be few, if any, relevant communications that would be affected.

Materiality. Each CAM must relate to a material account or disclosure in the financial statements. A CAM could be a component of a material account or disclosure and does not necessarily need to correspond to the entire account or disclosure in the financial statements, and it may not be material to the financial statements as a whole. The adopting release noted, as an example, that an auditor's evaluation of a company's goodwill impairment assessment could be a CAM if goodwill was material to the company's financial statements, even if there was no impairment.

Auditor Judgment. The new standard does not specify any items that would always constitute CAMs, but instead establishes a principles-based framework for determining the existence of a CAM. Under the new standard, an auditor would take into account, alone or in combination, the following non-exclusive list of factors when determining whether a matter involved especially challenging, subjective, or complex auditor judgment:

  • the auditor's assessment of the risks of material misstatement, including significant risks;
  • the degree of auditor judgment related to areas in the financial statements that involved the application of significant judgment or estimation by management, including estimates with significant measure uncertainty;
  • the nature and timing of significant unusual transactions and the extent of audit effort and judgment related to those transactions;
  • the degree of auditor subjectivity in applying audit procedures to address the matter or in evaluating the results of those procedures;
  • the nature and extent of audit effort required to address the matter, including the extent of specialized skill or knowledge needed or the nature of consultations outside the engagement team regarding the matter; and
  • the nature of audit evidence obtained regarding the matter.

The new standard, which the PCAOB believes is responsive to investors' requests, was designed to elicit more information about the audit directly from the auditor. In the adopting release, the PCAOB stated that it expects that, for most audits, the auditor will determine that at least one matter constitutes a CAM. However, the PCAOB acknowledged that there may be circumstances in which the auditor determines there are no matters that meet the definition of a CAM. In such an event, the auditor would be required to disclose that there were no CAMs.

Communication Requirements. After determining that a CAM exists, the auditor must include a description of the CAM in the auditor's report. For each CAM, the auditor would:

  • identify the CAM;
  • describe the principal considerations that led the auditor to determine that the matter is a CAM;
  • describe how the CAM was addressed in the audit; and
  • refer to the relevant financial statement accounts or disclosures that relate to the CAM.

According to the adopting release, the intent of communicating CAMs is to provide information about the audit of a company's financial statements that would be "useful to investors." Consequently, an auditor's description of the principal considerations should provide "a clear, concise, and understandable discussion" of why a matter involved especially challenging, subjective, or complex auditor judgment and avoid the use of boilerplate language. Furthermore, auditors should avoid the use of highly technical accounting and auditing terms when describing how they addressed a CAM in the audit.

Auditor Tenure

The new standard would also require disclosure of the auditor's tenure, specifically, the year in which the auditor began serving consecutively as a company's auditor. Some commenters, primarily companies and accounting firms, did not support disclosure of auditor tenure in the auditor's report and questioned the relevance and value of this disclosure. In contrast, investor commenters stated that information on auditor tenure would be useful, for example, in connection with deciding whether to vote to ratify the appointment of the auditor. While acknowledging the "growing trend toward voluntary disclosure of auditor tenure," the PCAOB adopted the auditor tenure disclosure requirement because voluntary disclosure is not provided for "a significant number" of audits subject to the PCAOB's jurisdiction and it believed that such public disclosure is important and in the public interest.

Other Changes to the Auditor's Report

The new standard also includes a number of additional changes to the auditor's report that are intended to clarify the auditor's role and responsibilities related to the audit and make the report easier to read. These changes include: (a) including a statement that the auditor is required to be independent; (b) addressing the auditor's report to a company's shareholders and board of directors; (c) changing some standardized language, including adding the phrase "whether due to error or fraud" when describing the auditor's responsibility to obtain reasonable assurance about whether the financial statements are free of material misstatement; and (d) standardizing the format, where the auditor's opinion would be required to appear in the first section of the auditor's report and section titles would be added to help guide the reader.

Applicability; Effective Dates

The new standard would generally apply to audits conducted under PCAOB standards. The CAM disclosure requirement does not apply to emerging growth companies, registered broker-dealers, investment companies other than business development companies, and employee benefit plans.

If approved by the SEC, the new standard and the related amendments to auditing standards would be phased in over time, which would give accounting firms and companies and their audit committees time to prepare for the new requirements. The new standard would be implemented as follows:

  • New auditor's report format, auditor tenure, and other information (not including communication of CAMs): audits for fiscal years ending on or after December 15, 2017;
  • For those entities to which the communication of CAMs applies, there is a phase-in schedule:

    • For large accelerated filers: audits for fiscal years ending on or after June 30, 2019; and
    • For all other companies: audits for fiscal years ending on or after December 15, 2020.

Auditors may voluntarily comply before the relevant effective date, at any point after SEC approval of the new standard.

Practical Considerations

The PCAOB appeared to minimize concerns that the CAM disclosure requirement would result in the disclosure of "original information" (which refers to information about a company disclosed by the auditor that has not been previously disclosed by the company). Indeed, the PCAOB expressed its belief that "[t]o the extent that an auditor's decision to communicate a [CAM] incents the company to expand or supplement its own disclosure . . . would be an indirect benefit of the standard." As a result, companies and their audit committees will need to put in place a process for reviewing any proposed CAM disclosure with their auditors to evaluate whether any changes should be made to the company's SEC disclosures.

Because the CAM disclosure will not first apply until March 2, 2020 (the 10-K filing deadline for a large accelerated filer with a 12/31 fiscal year-end), companies and their audit committees should consider asking their auditors in the next audit to prepare an example of what the disclosure would look like applied to that audit to better understand how the auditor would approach the identification of CAMs and the related disclosure in the auditor's report.

CAM disclosures are reminiscent of the disclosure of critical accounting estimates, which most companies include in their MD&A. Unfortunately, many of these disclosures – which are intended to provide greater transparency into the highly uncertain judgments and estimates in financial statements – have frequently simply repeated much or all of the significant accounting policies disclosure in the financial statement footnotes. CAM disclosure will be required when an "especially challenging, subjective, or complex auditor judgment" is required that involves an account or disclosure that is material to the financial statements. Where an account is material to the financial statements, it will likely be difficult for the auditor to resist disclosing something about the judgments in the audit of that area. In all events, companies should make sure that there is a consistent story between the CAM disclosures in the audit report and the critical accounting estimate disclosures in the MD&A.

In the adopting release, the PCAOB observed that some commenters, including many smaller accounting firms, preparers and audit committee members, were either less supportive or outright opposed to the new standard. The standard requires the approval of the SEC, which will seek public comment on the proposal. Although the SEC has never failed to approve a PCAOB-adopted rule, it is worth noting that SEC Chairman Jay Clayton, in his first public speech as Chairman, discussed his concern with regulatory compliance costs and specifically noted that small incremental requirements have a cumulative impact. He also recognized that when third parties, such as auditors, outside counsel, and consultants, are involved in regulatory compliance efforts, the costs – both financial costs as well as the cost in terms of time – can "skyrocket." In light of Chairman Clayton's recent remarks, interested stakeholders should consider submitting comments on the new standard during the SEC's notice and comment process, particularly if they expect incremental increases in audit and legal fees in connection with preparing and reviewing new CAM disclosures.

Finally, in light of the new standard's disclosure requirement of auditor tenure, audit committees of companies with long-tenured auditors should consider enhanced disclosures in their proxy statements (e.g., the audit committee report or in the auditor ratification proposal) about the benefits of having a long-tenured auditor as well as how the audit committee monitors auditor independence.


1. AS 3101, The Auditor's Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion. The PCAOB's adopting release for the new standard can be found here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions